China's New Tort Law Raises Questions in an Uncertain Civil Landscape

Whatever the failings of China's new Tort Liability Law, critics will be hard-pressed to argue it was hastily conceived. When the Standing Committee of the National People's Congress (NPC) passed the new law on Dec. 26, 2009, it had faced nearly eight years of consultation, debate and revision. The law, which takes effect on July 1, is a milestone in a country that already hosts more than one million tort actions annually.

While Chapter VI of the General Principles of Civil Law had provided some guidance on tort liability since its enactment in 1986, it left a convoluted patchwork of disconnected and haphazard laws and administrative measures, which has driven litigation.

"In China, finding the law is half the battle," says Richard Goetz, who leads Dykema Gossett's international practice group.

In large measure, the Tort Liability Law ameliorates the problem. It covers a wide range of subject matter, including product liability, environmental pollution, hazardous activity, motor vehicle accidents and medical malpractice. The law also promulgates general rules regarding causation, burden of proof, damage calculations, and joint and several liability.

In addition to damages, the law provides for specific performance remedies including orders to halt acts of infringement, remove unlawful obstacles, eliminate dangers, return property, restore property to its original condition, apologize or take other remedial actions.

"The Tort Liability Law is a significant step toward the creation of a comprehensive Chinese civil code in the future," says Robert Kwauk, who manages Blake, Cassels & Graydon's office in Beijing. "It significantly expands protection for victims of tortious acts."

For example, the law is the first statute to ensure compensation for mental distress; provide methods for calculating damages for physical injuries; clarify principles of causation; set up a recall system that attracts punitive damages in product liability cases; and address torts committed online.

"By adopting a basic tort law, the NPC is sending a message to the courts to take these issues seriously," says James Zimmerman, a partner at Squire, Sanders & Dempsey.

Rights and Remedies

Fortunately, and unlike some other Chinese enactments, the law is not aimed at foreign corporations.

However, that's not to say it brings no increased risk to U.S. and other foreign companies.

"The law will in all likelihood make China an even more litigious jurisdiction," Kwauk says. "And while it doesn't treat foreign companies differently from domestic concerns, tortious acts committed by foreigners that victimize local citizens may well resonate more negatively and engender greater outrage."

As Associate General Counsel, International Operations, at Ford Motor Co., Goetz was instrumental in establishing operations in China, and he is of similar mind on the new law.

"My general impression is that Chinese suits are much more frequently aimed at premium foreign brands as opposed to domestic brands or run-of-the-mill imports," he says.

Of particular concern to U.S. companies is the new law's broad scope. It specifically protects civil rights including the right to life, health, reputation, honor, self-image, marriage, privacy, ownership, security interests and intellectual property. These combine with a catch-all clause for tortious acts in general to give claimants almost unlimited causes of action.

Of particular significance are the provisions that make employers vicariously liable for damage caused by employees in the course of their duties and impose strict liability on polluters, even where a third party has actually caused the environmental damage. It also mandates liability for manufacturers or sellers of defective products, regardless of whether the manufacturer or seller is at fault, expressly articulating a right to punitive damages where a defendant knowingly produces or sells defective products that cause injury.

Yet despite its broad ambit, the law makes no mention of business-related torts such as interference with contracts or economic relationships, fraud, misrepresentation or unfair competition.

"While some of these principles are generally mentioned in other laws such as the country's Contract Law, Unfair Competition Law and Anti-Monopoly Law, they are not defined as compensable torts," Zimmerman says.

Work in Progress

In addition, considerable uncertainty remains regarding the Tort Liability Law's application. As with most Chinese enactments, the devil is in the details and the details are lacking. But some Chinese laws, like labor and foreign investment legislation, are at least the province of a regulating authority. There is, however, no authority regulating the Tort Liability Law.

"There is no opportunity for consultation with any government authority before the fact," Kwauk says.

And in some respects, the law lags behind existing judicial precedent. In 2003, for example, China's Supreme Court created a set of detailed rules for determining compensation for bodily injury.

"Those rules are much more practical than the very general rules in the Tort Liability Law, which will be difficult to apply in practice without guidance or interpretation," Kwauk says.

Furthermore, the law does not set out a procedural scheme for invoking the various remedies available, provides no guidance as to how damages for mental distress or punitive damages will be calculated, makes no references to potential defenses such as consent, and lacks detailed definitions of key terms including negligence, gross negligence, intentional acts, fraud, misrepresentation and reasonable care.

"The lack of detail and the absence of key statutory definitions means that the various courts and agencies involved could refuse to apply or misapply the law," Zimmerman says.

Regulating Risk

Experience with other general statutes suggests that eventually guidelines and interpretations will emerge.

"The Supreme Court will almost certainly issue guidance on various issues [the new law raises] from time to time," Kwauk says.

What seems certain is that China's high court won't issue guidance until government policy emerges.

"The authorities have not reached a consensus regarding a variety of issues, so it is difficult to tell what detailed rules will be introduced," says Xi Liao, an attorney at Hogan & Hartson's Beijing office.

Until then, as the law takes effect, risk management is the order of the day.

Close attention to the emergence of guidance is also critical, as is an audit of internal regulations and management policies to minimize the risk of contravention.

Where appropriate, companies should revisit their consumer or professional labelling practices, product use instructions and warnings, and crisis management policies in the event of adverse developments that might engage the Tort Liability Law.